Q4 2019 Earnings Call
Ladies and gentlemen, that's what the operator of today's conference call scheduled to begin momentarily until that time, let's look I'd be placed on.
[music].
Good afternoon, and welcome to the Bloom energy fourth quarter 2019 earnings call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this conference call is being recorded I.
I'd now like to turn the conference over to Mark Mesler, Vice President Finance and Investor Relations at Bloom Energy. Please go ahead.
Thank you. Good afternoon. Thank you for joining us on Energy's fourth quarter 2019 earnings conference call.
This conference call, we filed our Q4 2019 shareholder letter and earnings release with the FCC and posted it along with supplemental financial information that we will periodically reference throughout this call to our Investor Relations website.
Today, We also filed form Twelveb 25, with yes, he see indicating that we would file our form 10-K, no later than March 31, 20 Twond.
The matters, where we'll be discussing today includes forward looking statements regarding future events in the future financial performance or the company.
These statements are subject to risks and uncertainties, we discussed in detail in our documents filed with the FCC specifically the most recent reports on forms 10-K and 10-Q.
Which identify important risk factors that could cause actual results to differ materially from those contained in the form can statements.
We assume no obligation to revise any forward looking statements made on today's call.
During this call and in our Q4 2019 shareholder letter, we refer to GAAP and non-GAAP financial measures.
These non-GAAP financial measures are not prepared in accordance with U.S. generally accepted accounting principles and are in addition to and not a substitute for for superior to measures of financial performance prepared in accordance with gas.
A reconciliation between GAAP and non-GAAP financial measures is included in our Q4 2019 shareholder letter.
Joining me on the call today RK, our Shreedhar principal co founder and Chief Executive Officer, and Randy for Chief Financial Officer.
Karen Randy will review, the operating and financial highlights in the corner and then we'll take questions I will now turn the call over to K R.
Thank you Mark Good day, and thank you for joining the call.
Let's start with the topic, that's top of mind for all of US call. It 90.
Given what's happening, it's impossible to not feel tolerable and somewhat helpless.
This is a natural reaction to a human issue.
At Bloom energy, you're placing the health and safety apart extended workforce and data for customers and community that's our highest priority.
Today.
With most other businesses our normal operations are impacted by the current a wireless.
In the short dumb.
Committed to doing everything possible to mitigate its impact on our people.
Business and customers without compromising safety.
I also want to take this moment.
Addressed the restatement, we announced a few weeks ago.
What happened was unfortunate.
Following the announcement.
They look to speak with many of you to make sure you had the facts.
Appreciate the time, but all of you too.
You'll look at and study the issue and understand what it is and what it is not.
The restatement solely driven by an accounting adjustment for the capital equipment and installed portion of our managed services agreements.
Less than 10% or the total revenue for the affected period.
This is unrelated.
Unrelated.
Do our service business.
The life of course are worse or service contracts.
These accounting adjustments had no impact on cash and know what revenue is lost.
What we're doing at Bloom.
You know they do groundbreaking and critically important for the world.
I want to acknowledge that the pack hasn't always been a straight line and they've been hurdles along the way.
Humbly.
As this hurdles are thanks to an amazing team that is dedicated to the mission.
Yeah, well work come obstacles and made progress.
We went from zero.
To better we are today in nearly <unk> billion dollar eight year publicly traded company.
Let me now discuss the momentum we saw coming out of 20 Nike.
The report our sales backlog once a year.
During 2019.
We expanded our system sales backlog to 1983 systems, it's 43% increase from 2018.
We had reported very sluggish first half 2019 order book.
Clearly.
The business very strong business momentum in the second half of the year.
So what changed.
I see it.
Yeah, but for major reasons for this very positive chart.
Number one.
Customers start realizing that the electric grid is not able to offer reliability and resiliency Ben faced with frequent natural disasters and be a increasingly recognized thing and valuing the reliability and resiliency of our Bloom energy server deployments.
Number two several utilities in our sales territories have requested significant must be a rate increases.
Making blooms value proposition of cost and cost predictability more attractive to customers.
But three customers are now focusing on that need to adapt to climate change and make their businesses. It's silly.
Asking.
What do I need to do to keep my lights on securely.
Number four.
While drew more than you build projects may offer carbon credit benefits to a customer.
They did not provide energy security and business continuity benefits to keep its business operating during a part outage.
They do you really need Oh sustainability, and resiliency has gained traction with our customers and be providing unique solution in the marketplace that addresses them with equal force.
The summary of those four points the Bloom energy solution and its value proposition are resonating strongly with our customers.
Let me elaborate on the dynamics, you know talk to markets.
The U.S.
In South Korea.
In the U.S. market. We deployed are always on makes a good solutions I do stop and shop stores in New York.
These pilot projects are meeting the customers economic.
The liability and resiliency expectations for several quarters snow.
Dropping shop lease to repeat order for 40 off their grocery stores in Massachusetts, and New York.
These resilient deployments will allow us to shop in shop to better serve the local community at a time off need even with severe weather events, such as interest Thompson extreme heat disrupt the power grid.
The witness that increasing customer awareness for resiliency on both coasts, though.
You're a couple of metrics.
Additionally, in the past years, the person big of the total business that was micro grids Watson to low teens.
Our 2019, ending backlog had that number that well were 25%.
Also the micro good contribution mix in our sales pipeline had more than doubled.
That's in 2018, the contribution mix, what's 21% it grew to 45% ending 29 p.
We see Microgrids, that's a significant growth opportunity for bloom.
Manufacturing industries have become very sensitive to the price of not having power.
Manufacturers cannot afford power outages, because they lose in process inventory labor and overhead and capacity.
Part outages also imperiled safety and undermine the company's ability to fulfill customer commitments.
Because of all of these factors yet experiencing a healthy demand for our products from the manufacturing sector.
Now, let me address the accordion market.
Loom sales volume has increased significantly in Korea, since we entered that marketplace.
Customers recognized that our fuel cells are preferred solution for reducing emissions and providing high quality power to the grid.
We ended 2018.
Two major accordion generation companies as our customers.
Yeah, one contracts with Ford artist six major Gencos exiting 2019.
You're a few other highlights what 2019.
Well clarity and ease of comparison with the estimates that we provided on our Q3 earnings call.
Then I referenced revenue and non-GAAP non-GAAP gross margin metrics in my comments I will be the moving the impact of his seat fix all six adoption and accounting adjustments due to the restatement.
Be provide detailed reconciliations of these adjusted financial metrics to the GAAP metrics.
Our shareholder letter.
So the highlights.
One.
We had a year or what are your revenue growth of 25.2%.
Number two.
For the second half of 2019, we achieved a non-GAAP gross margin of 25.8%.
Number three.
We got a 17.7% reduction in our average product cost year over year.
See thousand $672 per kilowatt in 2018.
Two or $3021 in 2019.
Number four.
Our prototype units so system 7.5, it's performing to design goals and the program is on track.
Number five.
Entered into a collaboration with the cow bio to deploy our energy servers for the conversion of Daisy based into renewable electricity here in the U.S.
Well, that's a joint effort.
With energy power in India to deploy blooms first commercial scale onsite biogas solution from agricultural based do you want to support waste.
Number six.
The public 55 micro grids to 679 bid of digits, the something in over 1352 hours or same productivity for businesses.
Via the team we're very proud of this.
And now.
I will turn over to 90.
Thanks they are.
Throughout my prepared comments I'll be referring to the slides in the earnings call presentation that Mark.
Sure.
Before I dive into the highlights for the quarter given our announcement.
At a high level.
I would like to walk you through the accounting changes you're seeing a bloom.
The call from our press release that day.
Accounting adjustments related to our managed service contracts impacted slightly less than 10% of our revenues over the affected periods, which went from Q1 2016 for Q3 29.
Furthermore, less than 7% of the systems and our you're in December 19 backlog or managed services related so with that said I will now summarize the accounting changes.
First as communicated on February 12, you accounting treatment for managed service agreements are moving from a sale subject to an operating lease with upfront revenue and profit recognition to a financing lease.
Under this financing we used to treat but revenue will be recognized over the 10 year term of the customer agreements as power. This generated from the Bloom energy systems and cost against that revenue will flow through the piano at both the cost of goods sold line as well.
The interest expense line.
Even though we do not hold title to the assets to be in energy service will be put on our balance sheet and depreciated over the estimated life of the servers. So our cost of goods sold for these transactions will be in the form of depreciation.
Yup, what cash proceeds that we received from our financing partners. The banks will be offset with a liability in the form of eight loan on our balance sheet. This phone will be reduced were offset overtime as we record electricity revenue as power is.
Generated from the systems.
The amount of that offset for the electricity revenue will be the portion of the monthly payments made by far in customers that represent the lease payments to our finance partner.
Given that the upfront cash receipts. This book as a loan we won't impute, an interest charge and that will flow through our piano as interest expense.
While making these adjustments we also identified and made some additional minor adjustments for stock based compensation and derivatives expenses. This falls within the impacted range that we communicated on February 12, and reflected in the adjustments to our consolidated financial statements.
So in summary.
The revised accounting treatment for our managed service agreements is revenue recognized over the 10 year contract term.
Cost of goods sold against that revenue will be equal to period depreciation and we will see a non cash interest charge as a result of the balance sheet loan.
The second major area of accounting change will be the adoption of the new revenue standard H S. C 606.
Like many other companies we are required to adopt the new standard with our new physical you're ending December 31 2019.
As a reminder, he as see six so six is a standard that intends to improve the comparability of revenue recognition practices across entities industries juice discussions and capital markets going forward under the new standard we will see minimal impact.
On both revenue and profit the overall impact on 2020 piano is relatively small and the 17 millionish negative range revenue less than 2% and.
And then the 4 million as negative range for net income. This of course is relative to the current consensus estimates for 2020 again. This revenue and related profit is not lost just pushed into future periods and use non cash.
He is see six so six impact tour piano play.
2019, then we expect to be on a go forward basis.
This is due to fight is these experienced in 2019.
In order to provide greater clarity on both the impact of the accounting changes as well as the adoption of yes seasick. So six we have provided you with accounting change reconciliation schedules, but take our GAAP reported numbers and reconcile those for the impact of the.
As seasick, so six adoption as well as the impact of the accounting change restatement.
And we adjust for the noncash stock based compensation to get you to the adjusted financial metrics.
We did those as it reconciles our results with the estimates we provided you at the end of our third quarter.
And we will use these adjusted financial metrics for our discussion this afternoon.
Now onto the financial highlights for the quarter and I will include some full year data since we entered our fiscal year.
Note that all revenue and profit numbers that I referenced will tie back to the adjusted financial metrics presented in the slides for your reference.
Detailed reconciliations of these adjusted financial metrics with the accounting changes are found on slides 10 through 14 and the presentation deck.
So on to slide three.
In summary, this was a very respectable quarter.
You're in systems backlog rose by over 43% to 1983 systems Acceptances were 386 up 50.2% from Q4 2018 257 systems.
Revenue was 261.2 million.
Approximately 22% year over year.
Non-GAAP gross margin came in at 25.8% up 7.7 percentage points from Q4, 2018, and essentially flat with Q3.
Non-GAAP operating income was 21.3 million with adjusted EBITDA coming in at 32.5 million.
Adjusted EPS was four cents and finally, we ended the quarter with 377.4 million and consolidated cash and short term investments, which includes 19.5 million a P.P.A. cash.
Excluding the P.P.A. cash, we have 357.9 million of cash and short term investments.
For the 2019 year Acceptances were 1194 systems, a record and up 47.6% from 20 eighteens 809 systems.
Revenue totaled 929.1 million for the year up 25.2% from 2018 non-GAAP gross margin come in at 22.6% for the year non-GAAP operating income was 28.8 million and adjusted EBITDA was 97.3 million.
On that to some color for the quarter.
I'd like to start with backlog slide four.
As you all know we only report our backlog once per year. We ended the year with 1983 systems and product and install backlog a 43.3% increase over our Decemberthirty one 2018 number.
This is 66.1% higher than the 1100 to 94 systems recognized as revenue in 2019.
Recall that our goal is to maintain nine to 12 months, a product and install backlog at any point in time.
We are clearly at the higher end of that window as we enter the 2020 fiscal year.
The upfront system contract value of the 1983 system backlog is approximately 1.1 billion.
And this backlog excludes any service agreements as we recognize those billings as occurred on an annual basis.
If you were doing include the estimated value of the service revenue assuming all service contracts for these 1983 systems are renewed over the full contract term.
On another approximately 1.1 billion would be added to that backlog value.
Also excluded from both the 1.1 billion of upfront system contract value and the 1.1 billion of service billing value just discussed this the value of the future service billings for our existing installed base that estimated value of future service billings for systems in our installed base again assume.
I mean that the service contracts are renewed over the remaining contract term because approximately 2.1 billion.
And finally also excluded some backlog is future electricity revenue from our existing installed base for our previous Blue electrons program.
Total electricity revenue in 2019 was approximately 72 million.
So summing up all the current contract backlog and future contracted revenue yields approximately 4.3 billion of revenue that will be recognized in the future.
The majority of our current backlog is domestic and includes U.S. commercial and industrial customers utility scale projects and international customers.
On to slide five.
The 386, acceptances and 261.2 million of revenue were both Q4 records for Bloom.
Quarterly acceptances were up 50.2% year over year and up 27.8% sequentially.
Quarterly revenue was up 22.3% year over year and up 11.9% quarter over quarter. The majority of our revenue growth was driven by the mix of acceptances, where we had low or virtually no install revenue associated with them I will.
More color on this and my Hey, SP discussion.
On a year over year basis, we achieved 1194, acceptances and 929.1 million of revenue.
In both records for Bloom.
On an annual basis, acceptances were 47.6% and 2019 and revenue was up 25.2% relative to 2018.
Most of Q4's mix of acceptances were from existing customers and represent a broad range of verticals to include health care pharmaceutical universities utility scale projects food and beverage retail and even a sports video.
In total the 386 systems were spread over 12 different end customers with the majority of the installations in the United States.
On to slide six.
And our Q3 shareholder letter, we provided you with a range of Q4 sales price estimates.
As well as a range of total installed system cost estimates.
For Q4, 19, our average selling price, where asap come in at a $5906 per kilowatt a number just below the lower end of our estimated range.
Total installed system costs for T. I M. A C come in at $4289 per kilowatt, a number within and on the positive side or put another way below the midpoint of our estimated range.
Oh I'm on the topic of cost I'd like to take this opportunity to say 2019 was another excellent year and our product cost reduction efforts average product costs dropped 18% year over year, another inline with the average cost reductions over the past.
Last five years.
And as I mentioned in the past both SP and T.I.S.C. are impacted by a number of factors to include site location and applicable utility tariffs for that location.
Whether the site includes grid outage protection and or his mission critical.
The size of the site being installed generally the larger the installation the lower the cost on a per kilowatt bases and whether or not the scope of our work includes installation typically our international business does not include installation.
So once again I continue to stress that the important element is not the trend of the A.S.P. or the T.I.S.C., but the trend and the delta between the two.
This delta represents our unit level profit.
Via acceptances during the quarter, which directly correlates to our overall gross profit and gross margin.
The midpoint of the estimated a SP and T. I M. A C yielded a delta core margin estimate of 1670 or 1600 $70 per kilowatt as you can see on slide six our actual margin Delta was 1600 $17 per kilowatt.
The mix of customer sites that yielded from our pool of acceptances had a is piece that drove us toward the lower in the range on our A.S.P. and does drove a margin slightly below the midpoint of our estimates however, as mentioned acceptances or.
The volume metric slightly exceeded the top end of our estimated range.
I note that for 2020 and beyond we're going to try to simplify our forward looking estimates for you and I will share more specifics later on in our outlook for two 120 20.
Turning to slide seven.
Gross profit on an adjusted financial metrics basis was up almost 74.4% from 38.7 million in Q4 18 to 67.5 million in Q4 19 on a sequential basis gross profit increased 11.
<unk>, 0.9%.
Gross margin for Q4 come in at 25.8% a significant increase from last year's 18.1% and flat with Q3 Nineteens, 25.8%.
Our operating income in Q4 was 21.3 million up significantly both.
Sure and sequential basis, our reported adjusted EBITDA was 32.5 billion for the quarter non operating expenses worker plan and E B.
Four cents for the quarter.
For the full fiscal year gross profit.
Was 209.9 billion up 32.3% from 158.6 million for quite a team.
Gross margin came in at 22.6% an increase of 1.2 percentage points over applying 18.
Operating income as reported in the adjusted financial metrics increased to 28.8 million up 9.1% from that's why 18 and adjusted EBITDA come in at 97.3 million an increase of 45.4% over that's why 20.
Team.
Let me now switch to the balance sheet on slide eight we ended the quarter with 377.4 million.
Cash and short term investments.
This includes a totaled 19.5 million a P. P. Eight cash so excluding pp a cash we ended with 357.9 million total cash and short term investments.
This is an increase of 19.5 million from Q3.
However included in that 357.9 million a boom cash is 157.2 million of restricted cash.
This is up about 44.6 million from Q3 the driver of this increase in restricted cash is a cash this are committed to our financing partner in exchange for their commitment to increase their financing limit.
This will reduce overtime starting in July of 2021 with the full amount of this increase is expected to roll off by the end of 2025.
Keeping on the balance sheet, but turning to debt I wanted to provide an update on the 330 million of debt that I discussed on last quarter's call that we are in the process of refinancing with Jefferies reading the process.
The focus of our efforts has been on refinancing the approximately 289 million up to 6% convertible notes that are due in December of this year.
Since that call we have considered the range of options that I outlined last time.
We have narrow that range of options with the goal of pursuing a debt combination of term debt alongside another convertible note.
We will provide full details upon completion of the offering.
Given the strength of our business and the positive momentum we have we remain confident that we will work through this in the first half of the year and that our refinancing approach will be in the best interest of our equity and debt holders as well as our partners in the business.
Referencing slide nine.
Days sales was down one day from Q3 to 12 days driven by a higher volume in Q4, our days of inventory outstanding was up by six days from Q3 to 81 days driven by reduction in service and electricity cost of goods sold are payable days was down from Q3 by one day.
The 42 days.
I would now like to change the conversation to our outlook.
Well first I wanted to add that in Q4, we did a pretty thorough investor perception study.
One of the items coming out of that study is our investors preference to simplify our outlook and provide more transparency into our pool BNL.
So here's our attempt to do just that.
We're simplifying our estimates to two metrics as part of our outlook one for the top line and one for the bottom line for total revenue and adjusted EBITDA, providing these two metrics support additional insight into other aspects of the piano to include our service and electricity revenue.
Streams.
And stock based compensation, which is part of our adjusted EBITDA calculation.
This one.
Prior methodology, even though we are only providing estimates for revenue and adjusted EBITDA. We will continue to report acceptances SP and T.I.S.C.
Periodic Lee we may also provide visibility into other metrics that they have a meaningful impact on the quarter.
For Q1 2020, we expect total consolidated revenue to be between 140 and 160 million.
We expect operating expenses to be between 48 million and 51 million and this includes three to 4 million of one time expenses related to the restatement restructuring.
Finally to complete our outlook, we expected adjusted EBITDA to be between a 15 to 25 million dollar loss.
Q1 is challenged with respect to mix.
Mix will be more favorable through out the balance of the year.
Also we expect the cadence of both revenue and profit to be similar to prior years with each successive quarter seeing higher revenue and corresponding profits.
As we enter the new year I'd like to add a little color to our outlook, especially as it relates to the 2024 year.
We clearly had a record second half for Bloom with respect to bookings given this and the fact that for you as Cnine business. It generally takes nine to 12 months from order booking order acceptance, we do expect a far better second half of 2020 than the first half.
As there's just not sufficient time to transition this strong second half 2019 bookings and the first half 2020 revenue.
In fact, many of the Q4 orders will represent 2021 revenue.
So clearly a stronger second half ideally this would have allowed for an improved outlook.
You might recall on our Q2 earnings call, we discuss certain headwinds we were seeing in the markets.
And we provided a high level outlook for 2020 at that time.
Obviously with respect to the headwinds that ended one swung completely the other way.
And by Q4, we were seeing some strong tailwinds.
So again why not an improved outlook at this time it all has to do with what we're seeing in the world today with the recent events, primarily driven around the clone of wireless we felt good not prudent to be increasing estimates at this time as the world is simply a difficult place to judge today.
With that said and as already mentioned, we believe were an excellent position today, we have a strong backlog and the demand pull resilient power is real today, our customers no longer you'd look to boom for simple grid power arbitrage for for our sustainability attributes.
Hey look to bloom to keep their business operating.
Ill now turn back to KR before we take questions.
[music].
Thank you Randy.
I would like to thank fendi.
And the entire finance and accounting teams for their professionalism and integrity during this process.
The extraordinary work required.
To get our financials I thought was completed in a timely fashion what's significant.
Thank you Randy also for your dedication and leading the team to get us to this point.
And in terms of Randy successor, we're nearing the end of the process with our final candidates.
We thank Randy for agreeing to stay with us through the selection and Onboarding of new CFO.
We wish you well in your retirement.
Looking ahead to Twentytwenty.
We will continue on the cost reduction of our 5.2 platform.
The development of our 7.5 platform is on track and be we'll see that rollout of for assistance to our customers.
We will continue to develop and.
Low in zero carbon solutions with our technology platform.
I am confident that'd be a building a transformational energy technology business that as well the changing and highly relevant for our current time.
Before the call it 19 related disruptions.
We had increased business momentum and healthy backlog and very well positioned for the year.
He does our hope that our nation and the world will emerge out of this crisis. So.
After this crisis and solar.
We know that our strategy and offering.
There will be very relevant and needed.
The company are using this time to be prepared to serve our customers. After this crisis and solar.
Well with 19, you said minder that either absolutely important.
For us to build resiliency and adaptability in our daily life.
Ourselves against macro disruptions.
And just at this is true without health and wellbeing.
That's very true with electricity as well.
Our micro grid resiliency solutions are designed to build resiliency and adaptability for business.
As I see it going forward business leaders and boards will prioritize the implementation of that business continuity plan.
Actually have gone through the few weeks and Twentytwenty.
We have taken stock of who we are.
What our values and believe SAR.
And how he is on the company.
First.
We are about doing the right thing.
All that time.
Second.
We work hard to Delaware on promises to be make and our dedicated to constant and continuous improvement.
Toward.
Got it fully committed to our mission of delivering cost effective electricity solutions that a cleaner and more reliable to address the coffers and the impact of climate change and Pollard disruptions at around the world.
Thank you all and be will now take your questions.
If he would like to ask a question at this time. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the pound cake.
Your first question comes from Stephen Byrd with Morgan Stanley. Please go ahead.
Hi, good afternoon.
Okay. That's here.
I wanted to just first touch on care. The very first topic, you mentioned, the kroner virus and impacts on the business and just explore that a little bit further whether it be on supply chain or on on customer sales outlooks are on installation capability I know things are quite fluid and it's challenging to predict.
Exactly to the extent of impacts from the current a virus, but would you mind just elaborate a little bit further on how you think about potential impacts both today, but also potentially in the future.
Sure that's a extremely important and as you mentioned.
The key thing, it's dynamic inside and I want to emphasize that I started.
For us it's about doing that I think of it back which means safety first safety and well being of our employees apart community and of our customers. So in the immediate time, what B C is normal business is going to be affected that people being able to come.
There are.
You know supply chain getting disrupted and a lot of foreign customers.
Who may not want any any installation work being done at this point in time.
Our not feeling that instead I think to do so.
You know Thats your.
Mediate.
Issue, but if you go past that to the mid term issue because okay.
Is it don't Miss the F 16 months worth of backlog.
We have products and diesel blue chip customers.
Oh, such as a home depot at Wal Mart and stop <unk> shop wanting to keep their operations funny.
If you look at eight dnbi or customers like that I need to keeps communication lines funny. If you look at somebody like I said permanente wanting to hospitals study.
The important thing to remember in the meantime is while or other things may take a pause mother nature and climate is not going to take a boston to the VNC. That's important going forward. If you look at the products on the service the offer it's the base load for the power not even the peak load and.
Base load for these kind of blue chip customer business that we need is clean to be.
Longer term is really believe it or any connected centralized walk.
Well and that has to continue NBS trial.
That is equally an important aspect of localization in terms of protection safety business continuity.
This is going to become sentence answer and I think the call. It puts a very good exclamation point on saying RV thinking that way about every aspect of our life.
You know, we think thats been very important role going forward ceiling. That's the immediate mid long term, but I'm more in a more than happy to take this if you want.
Understood I mean, it sounds like there you know there could be potentially just some delays in the very near term given customers you know thinking through exactly how they plan their business in this.
Remarkable time I mean, many employers have requested done employees to remain home and so I think I think I understand that that message if I, if I got that right.
Yes, yes, that's correct and you know that would you know that will affect our suppliers.
You know our own employees typically you know like depending on how things turned out in the late next few days. So everything is fluid in that situation in the immediate short.
But you know the business was extremely strong.
Before this event happen.
He just a crisis, but this will end.
And how are we going to look then we emerge out of this crisis and Soviet trying to focus.
Safety in mind first but getting to focus with our energies how are we going to look and how strong is going to be than me. When I started this crisis and I'm extremely confident you're going to emerge out very strong coming on.
Understood and then just a separate question just on [noise].
Looking through the potential for carbon capture would you mind just given your latest thoughts on I guess, both the technical status of being.
Capable of cat.
So maybe a little bit more about just at a high level of the business prospects, what what could that mean and I'm thinking there about you know really the cost of capturing the practical uses of the C or two and just more broadly about about how you take about that opportunity.
Sure.
So you feel you look at carbon capture I think.
While you don't fit our CV instead, we think about this.
The.
First thing abolishing beyond what we do the first point I want to make us and dealers natural gas traditionally in our system today.
We have.
The least carbon footprint.
They have generating power without a slug emissions.
Technology, but you're asking the next steps forward different ways to think about this number one as.
Well again trying to get as much green molecule says, we can which is either renewable hydrogen.
Bio gas.
To come into our systems and in the pipeline that takes carving out in the first place even before you get stuck and you use biogas and get carbon capture you'll get a negative carpet now, let's talk about natural gas to zero carbon using carbon capture that is a highly scalable.
Hi Inn.
And a time sensitive you know something we can do in.
Next few years.
In large scale.
Across the board how can we do this.
One acre footprint.
Can do 100 megawatt class.
In that hundred megawatt or if you're able to get carbon capture and.
So any level and and be able to use looms aggressive cost reductions S. C.
Yes, he believed that we can get into a single digit.
Since foot go what our price.
Starting with natural gas I'm going to zero carbon sequester.
That's what we're focused on for the long term then we look at carbon capture and we think it's one of the most viable methods of providing the level that again and so you know kind of an electricity that fuel that's abundantly available today to supplement the.
And you will electricity we generate.
Very good. Thank you, let others ask questions. Thank you very much.
Thanks, Steve.
Next question comes from Michael Weinstein with Credit Suisse. Please go ahead.
Hi, guys.
I know mark.
Could you talk a little bit more about the gross the upfront margin, which dropped I guess, 44% quarter over quarter to 1617.
It looks to me like the main thing here is total installed system costs.
Yes. These are down I understand the S.P. being dependent on.
Regional mix, especially if it doesn't include Saul.
The.
Well, how do you see the a total installed system cost shaping up.
Beyond what do you see gross margins going I know you briefly mentioned.
Hello.
Yeah, So Michael good question.
[noise]. So obviously that the gross margin there was impacted primarily by two things one is our average selling price and that really significantly from order to order within the mix of what falls into the quarter.
And the other is our.
Product and install cost in combination with those which we refer to as total.
Turning to see total installed product costs.
And that gives you can see on long term that trend since it's been trending down now from quarter to quarter, you could see some fluctuations on weather.
And that fluctuations all tied back to the to the in store costs, but generally that that trucks down off from quarter to quarter, we're going to have a richer mix beauty just the mix of business and there is gonna be higher PSP and also higher profit.
And other quarters like like you just guided to its going to mix is gonna be as I pointed out in my prepared remarks is gonna be more challenged.
In.
The short term.
If you go back to industry. The short term I'd say over the next six spots here.
If you go back to.
Comments that we made it ended the second quarter, we certainly pointed out that.
We were being challenged to fill that order book.
Up through the first half of last year, we were a little more aggressive and.
King orders with the translated to some more is piece than we normally like to see it normally we think we would see in the future, especially given the strength that we saw in Q4, the tailwinds that we're facing today and you're seeing that flow through it in Q1 and a bit more in Q2.
Oh, I do want to without giving too much forward guidance here, what do you want to get back to two the prepared comments, it's all achieved what I said.
We expect 2020 to follow the cadence so 2019 and if you. If you go back to that you'll see as was the was loss in Q1.
Give or take breakeven in Q2 and then.
Pretty decent profits in Q3, and four I you know based on what we see today.
We would we would expect that cadence to continue here going forward.
I'll pause there and see if I answered. Your question are you want to go down on that's more.
Okay sounds like it's the second half, which is what he said before this.
Sure.
That's a solid second half, especially as the backlog starts to slow winter storms. So in doing so well and then I think you're asking question on the long term and here is to lead to think about it right.
Hi book to be contribution coming from the micro grids.
You would think about the shift in conversation not getting among our customers for all the reasons that you can imagine.
Off the face of not having all or was it the cost of power.
That is a very different discussion.
That's fair VC, the dynamic going you combine that with our constant cost reduction that you saw a b b field that going forward or the margin is going to be Hogan.
The increase yeah utility, but yes, and and and the third point like 90 correctly pointed out is the utility rates are going up so that combination of those see things.
Oh sure at all.
Lead to a higher higher margin as fee sequel.
Got you hey out on the term loan and convert.
Or you are you confident guess are you confident after talking to Jefferies, you're not going to have a lady problem here in the first half and you're going to be able to get to convert refinance the stores Tas or is that the reason why there's a term loan being considered that might be little easier to do at this point.
Yeah look.
We took this has.
Because.
We want to white cap the structure for the company long term.
And we certainly felt like some of them out of public permanent or long term debt makes sense for the company.
And we felt like ER.
The fact too good to get some equity more equity into the company and the best vehicle you do that given our share price today being low was was a convert or made sense for the company to give us the white long term jumped a structured as well.
Were you know well I don't know what heading to to put it.
We're kind of in the middle the game of getting that that whole transaction done and you.
You know until let's get started its not done but we.
We felt good about the path, we're going in as I pointed out the goal is to get that Don here in the first half.
I guess I My my comment is more aimed at the current market conditions.
Whether you're seeing any changes to the process.
Completed.
And whether the term loan specifically helps with that.
Sure they can get something done something.
Even if the market.
Okay.
You're exactly right and look the term by you hit the nail on it and it's a lot easier to get so.
That's what we needed to be with the term loan and <unk>.
And we want you want to do the markets are challenged out there today getting folks to focus on this today is so.
It's a little bit more of a challenge, but we still feel confident food, where we sit today.
And.
So we were our goal is to make an announcement on those so you know sooner than later, but we want to keep our commitment to fit.
We will occur in the first half.
Thank you.
Just as a reminder, thought picky question to the top of the hour. Your next question comes from Paul Coster with JP Morgan. Please go ahead.
Yeah. Thanks for taking my question I'm, just trying to understand the lag between the a the bookings the going into backlog can be the subs couldn't acceptances.
Tom be production I mean, it seems to me. The you know you could easily from right your production forward and growing from that but so it has to be some students to lead time on installations can you just talked about but little bit warrants why there is that's a bucket that's.
Between in timing between the suit.
Yes, Paul [noise].
What do you know, we're not only a company that builds a core technology company. It builds a product for the unit energy industry here.
And you're right we have all <unk>.
We have a great both supply chain and internal manufacturing operations and I can honestly say my five years here at the company, we not missed one ship, but related to anything to do with our supply chain or internal manufacturing folks are just terrific great quality.
And you're right, we can increase that and the folks constantly do but also bear in mind that for all of the U.S. commercial industrial were also a.
Sure likely better terms, the construction company and we don't we go out and we installed these systems.
And that process itself.
I like to think of it is kind of three phases. The first phase, which takes in the neighborhood of about three months.
We send field application engineer out to the site survey the side why don't with all the utilities are did that.
Back to a CAD.
So we're running a CAD machine they do all of the detailed construction drawings everything we need for all the approvals improvements and that whole process takes in the neighborhood ups, we bought it.
Then we have to get all of those approvals and that includes you know customer approval often the decides to do you still landlord approval the local.
Building permit approval from the local city or Oh, the jurisdiction, having having the ability to approve those building permits local gas electric company all of those approvals usually take in the neighborhood of three months as well so we're somewhere around six to seven months ended the process.
When when we get those approvals theres a person is actually on my team he signals to.
To start the construction process and to a.
To start the actual building of the systems from the time, we start a fuel so to the time, we deliver that system is about six weeks. So it's a fairly short time from start to finish.
And we build those systems, we construct him in the field and that whole process takes from the time, we you break ground at the time it fully gets up and running again another two to three months. So you add all that up on the out which would not in the nine nine months, sometimes 10 month timeframe and then I'll.
Mostly on some of our larger customers that gives you.
Large amount of sites at one time, even if the sites you books kind of start in that 910 months timeframe and then go three you know two or three more quarters before we get all of that Don So the point big as if the orders that we booked in Q4 most of them in November December timeframe would.
<unk> orders that would be it best delivered in Q4 of this year and a fair amount of that would spill over into Q1 Q2, a 2021.
Your last question comes from available with Raymond James. Please go ahead.
Thanks for taking my question on I know that in 2018, 12% or the revenue came from Korea, I imagine a significant percentage this past year as well given me the virus Impac in Korea, specifically I can you talk about.
Out how youre relationships with with S.K. and the Korean customers are being affected currently.
Yeah sure that's a good Gustavo.
Here is what I would say is.
The four in orders unlike the U.S.C.N. I orders come from the utility companies. These are for the utility based loads and they're usually in large industrial sites and as the cadence to it but they they put on hold proposal and the process so far.
Even during the month and I have to do months vanguardia of into a beacon now it is civilized talk there.
You have seen that process.
And it's normal cadence as opposed to anything anything very different how would that translate into future. It's very difficult for anyone of us to say, but at this point in time.
I've not seen.
Any change that we can see from our and do that entire process and they have a mandate to be able to do. This these are large our fees for mother's day megawatts at nine and they added to the sixth Gen goes and.
You know that have been no signals from any of them that any of that process is going to be.
Stalled in the near future.
Does that answer your question.
I I appreciate the color and can we get a quick update on me.
Lean shipping partnership with what Samsung I guess, where in <unk> six months that now any progress.
Yes, VR, we are making progress with them in yen dumb sulfate was breakdown schedule and who is going to do watch.
And you know because there is lot that has to be done on the ship onboard I love you don't be we'll be doing.
Are you know in our own systems and simultaneously there are many you know authorities.
Uh huh.
Regulatory.
Disease.
On this has to go to in terms of its design and approval process very similar to you on process that you have for a ground lease obligations and that that process is also going forward.
And that is simultaneously working but the ship, but that is discovery and understanding of customer needs and customer requirements and Thats also happening happening in parallel. So goes all the activities that are moving forward on that particular project.
Thank you very much.
Thank you for well since all the time, we had for questions I'll turn the call back to K expedite for closing remarks.
Well.
Apologies for keeping your five minutes longer than what you originally planned for on what is an unusual day or all of us in more ways than one I look what do you want to emphasize out here is.
Our strategy our product what we've been doing.
He is resonating with our.
With our customers.
Customers are beginning to understand what we do and value it for what it can delaware for them.
The call. It crisis is good Lee.
Okay.
A stumbling block along the way that slows the entire nation and that was down.
He does the crisis that has been appeal or.
I'm very confident that to be will be fully that.
To serve our customers vendor crisis and so far.
The company had the chance.
And I'm extremely confident of our Demux you're being resilient.
And being creative and being nimble.
To be a safe.
Be date Carole Park customers.
And see be able to serve our customers.
You know, what's the size and solar so thank you all for your time and he's really appreciate your support and your.
Phase and the company an admission.
Thank you.
This concludes today's conference call. Thank you for joining you may now disconnect.
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